Investors Could Be Concerned With De'Longhi's (BIT:DLG) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think De'Longhi (BIT:DLG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for De'Longhi, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.093 = €249m ÷ (€3.6b - €958m) (Based on the trailing twelve months to September 2022).

Therefore, De'Longhi has an ROCE of 9.3%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Durables industry.

View our latest analysis for De'Longhi

In the above chart we have measured De'Longhi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering De'Longhi here for free.

What Does the ROCE Trend For De'Longhi Tell Us?

When we looked at the ROCE trend at De'Longhi, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 9.3%. However it looks like De'Longhi might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, De'Longhi is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think De'Longhi has the makings of a multi-bagger.

On a final note, we've found 3 warning signs for De'Longhi that we think you should be aware of.

While De'Longhi isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.